Throughput Accounting is an alternative to cost accounting that optimises the contribution of each business function to top line throughput rather than blindly attempting to minimise operating expense. While commonplace, cost accounting makes an irrational basis for value stream management because it fails to account for the stream’s market and system constraints, and also for the interdependencies of value streams across a portfolio. Throughput Accounting continuously identifies and prioritises the bottleneck that dominates throughput per stream and per portfolio.
Cost accountants have tried over and over to calculate this property for software delivery, using measures like lines of code (LoC) and function points (FP), and they have universally failed. LoC don’t equate to cost per unit revenue, because for example, refactoring reduces LoC while increasing throughput, and lowering operating expenses. FPs are even worse because, unless they contribute to improvements in a bottlenecked constraint, they can have no effect on revenue at all.
Throughput Accounting comes from the work of Eli Goldratt on the theory of constraints. It bases prioritisation decisions on real effects on bottom line ROI. Its fundamental premise is that the goal of any business must be to maximise throughput.
Throughput = Operating Expense + Net Profit
On first blush that may seem counterintuitive. Here’s why it makes sense: